Analysis: 'No time to waste': Japan Inc set to step up outbound M&A

Renesas Electronics

17/03/2024 23:00

(Repeats item published earlier. No change to text.)
    By Makiko Yamazaki, Scott Murdoch and Kane Wu
       TOKYO/SYDNEY/HONG KONG, March 15 (Reuters) - Japan Inc's
pursuit of overseas deals is set to accelerate as the country's
corporate giants come under pressure to boost capital efficiency
and the central bank moves towards ditching policies that
depressed the currency.
    A growing number of Bank of Japan policymakers are warming
to the idea of rising interest rates when they meet March 18-19,
and while rate increases are widely expected to be incremental,
the change would boost the yen and deal prospects, bankers and
lawyers said.
    A stronger yen  JPY=EBS , which has gained about 1% against
the dollar so far this month, would make overseas targets
cheaper for potential acquirers in Japan, from sectors ranging
from financials to technology.
    "An increase in interest rates in Japan may be positive for
the yen ... and make it easier for Japanese companies that are
currently more domestically focused to do outbound deals," said
Natsuko Ogawa, a Melbourne-based Ashurst partner. 
        For those companies with significant global operations,
any change in Japanese interest rates would likely have "limited
impact" on their ability to finance those transactions, said
Ogawa, who specialises in Japanese cross-border deals.
    Nearly $17 billion worth of overseas acquisitions by
Japanese companies have been announced this year, according to
LSEG, in the strongest start to a year for outbound activity
since 2019.
    The momentum this year comes on the back of an 81% jump in
outbound deal value last year to $58 billion, as companies
looked to tap alternate revenue streams to soften the impact of
a deflationary domestic economy.
    Japan's outbound M&A boom set a sharp contrast with
activities in the rest of the Asia Pacific region, where deal
values fell 26% in 2023 and 16% so far this year, according to
LSEG, mainly due to a sharp slowdown in China.    
    Accelerating an overseas buying spree by Japanese firms is
also a recent push from regulators and activist shareholders for
better capital efficiency, including the Tokyo exchange's call
last year for companies to come up with specific action plans.
    "Pressure from behind to make use of cash or return it to
shareholders is growing ever stronger," Yuzo Otsuka, head of
Japan M&A Advisory at Barclays, said. "Companies now feel that
they have no time to waste and need to move forward for growth."
    
    ACCESS TO FINANCING 
    The U.S. has been the biggest target nation for Japanese
companies, followed by Australia.
    Major outbound deals in recent months include Nippon Steel's
 5401.T  $15 billion acquisition of U.S. Steel, and Renesas
Electronics'  6723.T  $5.9 billion deal for electronics designer
Altium  ALU.AX .
    U.S. President Joe Biden has raised concerns over Nippon
Steel's takeover of the 122-year-old U.S. steelmaker, raising
the spectre of political risks to Japanese companies' outbound
drive.
    Bankers, however, said political reactions to the Nippon
Steel deal were not affecting deal appetite. They said that such
opposition was unique to the steel sector where nationalistic
sentiment was always strong.
    In response to the strong deals momentum, some advisory
firms are boosting headcounts.
    Law firm Freshfields has recently hired four M&A lawyers in
Japan and is recruiting more to join its Tokyo-based practice,
said its head of Japan, Takeshi Nakao. A further five
entry-level associates were also due to join in the next year.
    "I do think that Japanese bidders are more valued than they
were a few years ago," Noah Carr, partner at Freshfields, said.
"One, because there's less competition. Two, because Japanese
buyers are just more reliable, they have better access to
financing, they've got the money to spend, they can manage
regulatory approvals – and they are capable of taking
sophisticated commercial views on terms."
    Mizuho Securities has expanded its M&A team by 10% over the
last three years.
    There are, however, some risks to the outbound pursuits.  
    Bain & Company Partner and Japan Chairman Shintaro Okuno
said Japanese buyers are often seen as overly optimistic about
expected synergies when others are turning cautious about
geopolitical risks such as the war in Ukraine and the U.S.
presidential elections.
    "The Tokyo bourse's capital efficiency call could also
prompt some firms to jump on overseas M&As as an easy option to
spend excess cash, but that could result in overpaying and
eventually booking impairment losses," Okuno said.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Japan's growing momentum in deal making    https://reut.rs/4chTI89
Japan Inc accelerates overseas deals pursuit    https://reut.rs/3wW6wkA
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Makiko Yamazaki in Tokyo, Scott Murdoch in
Sydney, and Kane Wu in Hong Kong, additional reporting by Selena
Li in Hong Kong; Editing by Sumeet Chatterjee and Stephen
Coates)
 ((Makiko.Yamazaki@thomsonreuters.com; +81-3-4563-2805;))